*968 1. During 1930 certain real estate taxes were assessed against petitioner's Biltmore, North Carolina, real estate, a considerable part of which was used in connection with a dairy business operated by petitioner, the books of which were kept on an accrual basis. The income and expenditures relating to the remainder of the estate were also kept on an accrual basis. Held, the taxes should be accounted for on the accrual basis rather than on the cash basis.
2. During the taxable year 1931 petitioner maintained and conducted in the nature of a museum and park a private estate to which the public was admitted at a fixed admission charge which was estimated as sufficient to defray the expenses of opening the house and grounds to the public. Held, petitioner in so doing was not carrying on a trade or business within the meaning of that term as used in section 23(a), Revenue Act of 1928, and that certain expenditures made in connection therewith were not deductible as ordinary and necessary business expenses.
*904 This proceeding involves a deficiency*969 in income tax for the calendar year 1931 in the amount of $2,924.86. The petition originally *905 assigned one error, namely, that "The respondent has erroneously disallowed a deduction for real estate taxes of $20,167.08 paid in 1931." Later, petitioner was permitted to file an amendment to her petition in which she assigned an additional error, namely, that "The respondent has erroneously failed to allow as a deduction certain expenses aggregating $36,309.18 incident to the operations of the Biltmore House and Gardens."
FINDINGS OF FACT.
We find the facts as stipulated, and incorporate herein the following:
(1) The petitioner is an individual and was, during the tax year 1931, the sole owner of the property known as Biltmore House and Biltmore Estate, at Biltmore, in Buncombe County, North Carolina.
(2) On the said Biltmore Estate the petitioner owned and operated the business known as Biltmore Dairy Farms, a commercial enterprise engaged in producing, processing and selling dairy products, the gross sales of which in, and in the vicinity of, the cities of Asheville and Charlotte, North Carolina, during the tax year 1931 amounted to more than $500,000; the books*970 and records of which said business were, for said year and all other years, kept and maintained on an accrual basis and the operations of which were so reported on petitioner's return for the tax year 1931 and previous years. The business consisted of the operation of a large creamery, a large dairy herd and farms on Biltmore Estate, the farms and other lands used in whole and in part for the purposes of the business of Biltmore Dairy Farms approximated 2,500 acres out of a total of approximately 12,000 acres within the boundaries of the Biltmore Estate.
(3) The items of "Total Income from Business" in Schedule A of petitioner's income tax return for the calendar year 1931, amounting to $573,782.37, as shown by the photostatic copy of said return which is hereto attached marked "Exhibit A", was made of (a) gross sales $525,756.25, increase in herd $610.00, profit on sales of supplies $601.71 and discounts $28.90, realized in the operation of the business of the Biltmore Dairy Farms; (b) admissions to Biltmore Estate and Biltmore House and Gardens $38,653.50 and (c) sales of views of Biltmore Estate and Biltmore House and Gardens $2,633.23. The books of the Biltmore Dairy Farms, *971 Biltmore Estate and Biltmore House and Gardens were kept, and the income and deductions were returned, on an accrual basis, and all the balance of petitioner's books and accounts were kept, and the income returned, on a cash basis.
(4) It had been the petitioner's uniform practice for many years prior to 1931 to keep her personal books and records and to report her personal income and deductions for Federal tax purposes on a cash basis, her return for the tax year 1931 was made on said basis and she included in the deductions taken in her return for said year the sum of $20,267.08, the same being the balance of county, town and city taxes, or property tax, for the property tax year 1930-1931, the total of which tax assessed against the Biltmore Estate property was $57,257.52, said balance of $20,267.08 was paid by her on May 30, 1931; $35,671.76 of the total assessment having been prepaid and discounted by the petitioner on November 15, 1930 upon a preliminary estimate of the amount of the tax, which deduction of $20,267.08 was disallowed by the Commissioner.
* * *
*906 No part said taxes was paid by, or charged to, the business owned and conducted by the petitioner*972 under the name of Biltmore Dairy Farms.
(5) The petitioner in its [sic] return for the year 1931, failed to claim as a deduction from gross income reported, certain additional expenses aggregating $36,309.18 incurred and paid incident to, and necessary in the operation of the Biltmore Estate and Biltmore House and Gardens. Petitioner did claim as a deduction from gross income and was allowed for the year 1931 by the Commissioner of Internal Revenue the amount $44,460.07, representing salaries, wages and sundry items of expense incurred and paid in connection with the exhibition of the Biltmore House and Gardens.
The said Biltmore House and Gardens, and the landscaped portion of Biltmore Estate, were opened to the public as a museum on March 15, 1930 at a fixed charge of two dollars per adult person, forty cents for each child under twelve years of age and one dollar for each person attending conventions in or near the City of Asheville, and with the improved and landscaped portions of said Biltmore Estate were maintained, operated and conducted as a museum and park to which such admissions were charged and paid during the calendar year 1931, the admission to Biltmore House*973 and Gardens including admission to the Biltmore Estate and the improved and landscaped roads of the Biltmore Estate and the said landscaped portion of said Biltmore Estate constituting a large part of the attraction to the public for which admissions were charged and paid during said year. Biltmore House and Gardens are situate some four miles from the entrance gate of Biltmore Estate, the approach road to the house being about four miles in length and the exit road by way of the Biltmore Dairy Farms being about five miles in length, which roads and the landscaped portions of Biltmore Estate traversed by said roads are landscaped, kept up and maintained as a principal part of the attraction to visitors who pay the aforesaid admissions. The description of Biltmore Estate and Biltmore House and Gardens, and the rules and regulations for visitors are hereto attached marked, respectively, Exhibits "C" and "D". The entire gross receipts from said admissions during the tax year 1931, and the sale of views, amounting to $41,286.73, were duly returned as income by the petitioner.
(6) The petitioner, upon the opening of said Biltmore House and Gardens as a museum, to-wit, on March 15, 1930, removed*974 the residence of herself and family from the said Biltmore House and established the residence of herself and family in the house and property known as "The Frith," located in Biltmore Forest, adjoining, but not part of, the Biltmore Estate, which property known as "The Frith" was not owned by the said petitioner.
That the petitioner never, after March 15, 1930, when she removed her residence from Biltmore House as aforesaid, occupied Biltmore House or any portion of the Biltmore Estate as a residence, except for a short period of about ten days during the Christmas holidays in the year 1931, when she returned to Biltmore House and occupied a small part of said house never opened to the public, for the said period of about ten days, principally and primarily for the purpose of providing the customary Christmas tree and Christmas entertainment for the employes of the Biltmore Estate, the entire cost of which was paid by her personally and not charged as an operating expense of the Biltmore Estate or Biltmore House and Gardens, the cost of food and provisions and servants for herself and family during the period of such occupancy being paid by the petitioner personally and not charged*975 as a part of the cost of operation of Biltmore House and Gardens or the Biltmore Estate, or claimed as a deduction in her income tax return for said year.
* * *
*907 (7) That all the accounts of the cost and expenses of maintenance and operation of Biltmore House and Gardens and Biltmore Estate were accurately and carefully kept separate and apart from the living and maintenance expenses of the petitioner and her family and the residence, or residences, occupied by her on and after March 15, 1930 and during the calendar year 1931, and no part of the personal maintenance expenses of the petitioner and her family was included in the cost of operation and maintenance of Biltmore House and Gardens or Biltmore Estate from and after March 15, 1930.
(8) That, with the exception of the aforesaid ten days at Christmas time 1931, neither Biltmore House nor any portion of Biltmore Estate was ever occupied by the petitioner as a residence after March 15, 1930 and the same, with the gardens and the landscaped portion of Biltmore Estate, was maintained and conducted in the nature of a museum and park, to which the public was admitted at a fixed admission charge, and the same was operated*976 and conducted and maintained solely and exclusively as such a museum and park and was held out and advertised to the public as such.
(9) No part of the cost of administration and maintenance of Biltmore Estate amounting to the sum of $49,190.17 during the calendar year 1931 was returned as a deduction in the income tax return of the petitioner for said year 1931, and of the said sum of $49,190.17 the sum of $36,309.18, made up of items hereinafter specified, was chargeable to the maintenance and operation of the landscaped portion of Biltmore Estate which was opened to the public at a charge for admission and thereafter kept and maintained as an attraction to the public. The aforesaid items paid in connection with the maintenance and operation of that part of Biltmore Estate, during the calendar year 1931, which was open to the public at an admission charge as aforesaid, are as follows:
| 90% of the cost of administration, amounting to $12,826.74 which included superintendent's salary, office salaries and expenses incident to the administration, management and account of Biltmore Estate and Biltmore House and Gardens | $11,544.07 |
| Cost of care and maintenance of landscaped and planted areas of Biltmore Estate open to public for admission charge | 11,837.24 |
| Cost of repairs and maintenance of roads open to the public or used in connection with the maintenance of the portion of the estate open to public for admission charge | 11,182.73 |
| Workmen's compensation and other insurance of employes engaged in the care and maintenance of Biltmore Estate | 560.66 |
| Cost of employer's portion of group life insurance premium on employes of Landscape Department of Biltmore Estate | 1,185.48 |
| Total deduction for the cost of conducting, operating and maintainingthe portion of Biltmore Estate open to the public for an admission charge, during the year 1931 [sic] | 36,309.18 |
*977 Exhibit C, referred to in paragraph 5 of the stipulation, is an attractively printed pamphlet giving pictorial views of Biltmore House and Gardens and the Biltmore Estate, printed for distribution to visitors. In addition to the pictorial views printed, the pamphlet contains reading matter, in part as follows:
BILTMORE HOUSE, which because of its magnitude, remarkable grounds and gardens, priceless collection of paintings, antiques, and other objects of art, *908 is unique among American country establishments, was opened to the public March 15, 1930.
The house was built 40 years ago at a cost of several million dollars by the late George W. Vanderbilt who spent much time traveling all over the world to collect the art pieces it contains. Heretofore none except guests of the family has ever entered Biltmore House or known of the invaluable collection that Mr. Vanderbilt accumulated.
The collection includes the chess table Napoleon took with him to St. Helena. Cardinal Richelieu's ceremonial robes, tapestries, a 14th Century Turkish rug, the ceiling from an old Italian castle, innumerable carvings and bronzes, original Sargents, Boldinis, Whistlers, and other objects*978 of almost fabulous worth.
* * *
Biltmore House is the center of an estate that contains 12,000 acres. It once included 120,000 acres, but much of this land was turned over to Pisgah National Forest by Mr. Vanderbilt. The estate has 17 miles of macadam roads and 120 miles of riding trails and dirt roads. More than 750 persons are employed on the estate. * * *
An admission charge is made, estimated as sufficient to defray the expenses of opening the house and grounds to the public. * * *
Exhibit D, referred to in paragraph 5 of the stipulation, is a copy of the "Rules For Visitors." These rules provide in part that visitors may travel only over the designated roads; that under no circumstances may any visitor attempt to go into any part of the house not designated as open to visitors; and that prolonged stops or parking along or on the roads is prohibited, except at the designated parking places.
OPINION.
BLACK: We shall first consider the deductibility during the calendar year 1931 of the North Carolina real estate taxes in the amount of $20,267.08 which petitioner paid on May 30, 1931. Section 23(c) of the Revenue Act of 1928 provides that in computing net income*979 there shall be allowed as a deduction, "Taxes paid or accrued within the taxable year * * *." Section 43 of the same act provides:
The deductions and credits provided for in this title shall be taken for the taxable year in which "paid or accrued" or "paid or incurred", dependent upon the method of accounting upon the basis of which the net imcome is computed, unless in order to clearly reflect the income the deductions or credits should be taken as of a different period.
Petitioner concedes that the taxes in question accrued during the year 1930, but contends that, since it had been her uniform practice for many years prior to 1931 to keep her personal books and records and to report her personal income and deductions on a cash basis and her return for 1931 was made on that basis, she was within her statutory right to deduct in 1931 that portion, namely, $20,267.08, of the $57,257.52 taxes assessed in 1930 against the Biltmore Estate property which was actually paid during 1931.
*909 In referring to her "personal books and records" and her "personal income and deductions", it is assumed that reference is being made to all her books, records, income, and deductions other*980 than the books, records, income and deductions relating to the Biltmore Dairy Farms, the Biltmore Estate, and the Biltmore House and Gardens. In any event, we find the two classifications convenient, and will hereinafter refer to the one as personal and the other as Biltmore. An examination of petitioner's income tax return for the calendar year 1931 (referred to in the stipulation as Exhibit A) shows that petitioner reported substantial amounts of personal income and deductions aside from the Biltmore income and deductions.
It is petitioner's position that the real estate taxes in question formed no part of the operating expenses of Biltmore, but belonged to the personal classification instead. From this position she argues that it was perfectly proper for her to keep her personal books and records on the cash basis and her Biltmore books and records on the accrual basis, and cites as authority therefor .
The respondent contends that the Stern case is inapplicable and distinguishable on the facts; that petitioner's transactions which we have classified above as personal did not amount to a separate trade or business; that the*981 Stern case applies only where there are separate businesses; that where both the accrual and the cash bases are used, as they are used in the instant case, the predominating basis should be adopted; that in the instant proceeding the accrual basis predominates and should have been applied to her personal transactions as well as her Biltmore transactions; and that the instant proceeding is ruled by .
In the Stern case, Joseph and Samuel Stern were partners operating under the name of Stern Brothers. The partnership operated two separate and distinct businesses, wholly different in character - one a mercantile business and the other a coal land business. The accounts of the two businesses were kept separate and distinct. The accounts of the mercantile business were kept on the accrual basis; those of the coal land business on the cash basis. This method of keeping the accounts had been regularly and consistently followed for many years. Under these circumstances we held that, since the two businesses were separate and distinct and in each case the system used reflected accurately the income received, the use of a different*982 system of accounting for each was proper.
In the Chipley case, John I. Chipley was president of a corporation engaged in business as an automobile dealer at Wilmington, North Carolina. He was also engaged in business in his individual capacity as a dealer for the same make of automobile at Greenwood, South Carolina. The books in connection with his individual business *910 were kept on the accrual basis. He had some income, not connected with his individual business and negligible in amount, which he did not accrue on his books, but he recorded it as and when received. He was also given credit on the corporation's books for an annual salary of $12,000 as president. During the taxable year he withdrew only $1,819.92 from his salary account. Under the facts in that case we held that the accrual method overwhelmingly predominated in the keeping of Chipley's books and, therefore, he should have reported in his gross income the full amount of the $12,000 salary which was credited to his account on the books of the corporation, and not merely the $1,819.92 which he withdrew in cash from his salary account with the corporation.
The instant proceeding is distinguishable, *983 we think, from the Chipley case. There, the items not connected with the individual's separate business were negligible and regarded by us as insignificant. Here, petitioner's personal income reported on her return, aside from her Biltmore income, amounted to $168,264.15, exclusive of $173,609.67 reported as tax exempt interest. These items were numerous and not insignificant. They were separate and distinct from the Biltmore items. The books in connection with the personal items were kept and the income was returned on a cash basis. The books in connection with the Biltmore items were kept and the income was returned on the accrual basis. This had been petitioner's uniform practice for many years. We think the principles applied in the Stern case apply here. We do not think it makes any difference in this case whether petitioner's personal transactions amounted to a separate business. We hold, therefore, that it was proper for petitioner to report her personal items on the cash basis and her Biltmore items on the accrual basis, but this holding does not decide the issue in petitioner's favor.
We do not agree with petitioner's position that the real estate taxes*984 in question formed no part of the operating expenses of Biltmore but belonged to the personal classification instead. It was stipulated that these taxes were for the property tax year 1930-1931, and that they were assessed against the Biltmore Estate property. It is, therefore, our opinion that they should be taken into account on the same basis that all the other items of Biltmore are accounted for, namely, on an accrual basis.
Undoubtedly if these taxes had been an expense of the dairy business, they should have been treated on an accrual basis, for the books of that business were admittedly on the accrual basis, but it has been stipulated that "no part of said taxes were paid by or charged to the business owned and conducted by the petitioner under the name of Biltmore Dairy Farm." However it has also been *911 stipulated that "The books of the Biltmore Dairy Farms, Biltmore Estate and Biltmore House and Gardens were kept, and the income and deductions were returned, on an accrual basis, and all the balance of petitioner's books and accounts were kept, and the income returned, on a cash basis." Therefore it appears plain that all income and deductions, except taxes, *985 connected with the Biltmore Estate were treated by petitioner on an accrual basis. Petitioner concedes that the $57,257.52 taxes assessed in 1930 against the Biltmore Estate property accrued as a liability against petitioner in 1930. Therefore in view of the stipulation that the books of the Biltmore Dairy Farms, Biltmore Estate, and Biltmore House and Gardens were kept and the income and deductions returned on an accrual basis, we think the taxes in question must be treated on the same basis. We, therefore, sustain the Commissioner in his disallowance of $20,267.08 taxes which were paid by petitioner on the Biltmore Estate property in 1931 but had accrued in 1930. If the taxes had been on other property which petitioner owned not connected with the Biltmore Estate, the answer might be different. In fact the statement attached to the deficiency notice shows that, of the $79,024.56 taxes claimed as a deduction by petitioner on her return, $58,757.48 has been allowed as a deduction and only the $20,267.08 which the Commissioner determined accrued against the Biltmore Estate property in 1930 has been disallowed.
The second issue is whether petitioner is entitled to deduct from*986 her gross income for the year 1931 certain additional expenditures, aggregating $36,309.18, which were incurred and paid during that year as being incident to and necessary in the operation of the Biltmore Estate and the Biltmore House and Gardens. If allowable, authority for the allowance must be found in section 23 of the Revenue Act of 1928, the pertinent part of which is as follows:
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
(a) Expenses. - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.
Petitioner did not claim the additional expenditures aggregating $36,309.18 as a deduction in her 1931 income tax return. The issue was properly raised by an amendment to the petition filed in the present proceeding. The additional expenditures of $36,309.18 are itemized in the stipulation of facts herein previously set forth, and are in addition to the $44,460.07 representing salaries, wages, and sundry items of expense incurred and paid*987 in connection with the exhibition of the Biltmore House and Gardens. The latter amount *912 of $44,460.07 was deducted by petitioner in her return for the year 1931 and was allowed by the respondent. Petitioner in her return reported as a part of her gross income the amount of $41,286.73 as representing $38,653.50 from admissions to the landscaped portion of the Biltmore Estate and the Biltmore House and Gardens and $2,633.23 from sales of views of Biltmore Estate and Biltmore House and Gardens.
The respondent in his brief has divided the Biltmore Estate into three separate departments, namely, (1) Biltmore Dairy Farms, (2) Biltmore House and Gardens, and (3) landscape department. He concedes, and it is so stipulated, that the Biltmore Dairy Farms is a separate trade or business. The income and deductions of the Biltmore Dairy Farms are not in controversy in this proceeding.
The deductibility of the expenditures aggregating $44,460.07 is likewise not in issue between the parties, although, as will appear later, it is hard to reconcile the respondent's allowance of this item and his refusal to allow the item of $36,309.18. The respondent epitomizes his entire argument*988 by the single statement that the ownership and maintenance of the Biltmore Estate "as a whole" is not a trade or business within the meaning of section 23(a) of the Revenue Act of 1928. In his brief, "Respondent denies that petitioner is entitled to the deduction of $36,309.18 for the reason that the ownership and operation of the Biltmore Estate, exclusive of the Dairy Farms, is not a trade or business within the meaning of Section 23(a), supra, and the allocated sum of $36,309.18, or any part thereof, does not qualify as 'ordinary and necessary' expenses paid or incurred during the taxable year 1931 in carrying on any trade or business for profit within the purview of said section." If the only department of the Biltmore Estate to be recognized as a trade or business is the Biltmore Dairy Farms, then it is difficult to find the authority for allowing the $44,460.07 which respondent has allowed as an ordinary and necessary expense paid or incurred during the taxable year. It was stipulated that the $44,460.07 was "incurred and paid in connection with the exhibition of the Biltmore House and Gardens." It was also stipulated that the $36,309.18 was incurred and paid and was incident*989 to and necessary in the operation of the "Biltmore Estate and Biltmore House and Gardens." The only difference between the two items is that the $44,460.07 was applicable only to department (2), whereas the $36,309.18 was applicable to departments (2) and (3). The admission fees paid by the public, which constituted over 93 percent of the gross receipts, were for admissions to both departments (2) and
(3). The respondent in his brief explains the allowance of the $44,460.07 item as follows:
There is no question but that the receipts amounting to $41,286.73, received from the public for the privilege of visiting the Biltmore Mansion and Gardens *913 are taxable as gross income, as defined by Sec. 22(a), Rev. Act of 1928, 45 Stat. 791, and respondent has reciprocated petitioner's generosity in permitting petitioner to deduct from gross income for 1931 the sum of $44,460.07, made up by specific items of expenses absolutely necessary and incident to opening the mansion and grounds to visitors.
We doubt if there is any material distinction between the expenditures aggregating $44,460.07 and the expenditures in question aggregating $36,309.18. It does not follow, however, *990 that because the respondent has allowed the former we must allow the latter. What he has done in a matter which is not before us does not control our decision in a matter which is before us.
Is petitioner entitled to deduct the amount of $36,309.18 in question under section 23(a), supra?The answer depends upon whether the opening of the landscape portion of the Biltmore Estate and the Biltmore House and Gardens to the public as a museum at fixed admission charges amounted to the "carrying on of any trade or business" as that term is used in the statute. Whether one is engaged in the carrying on of a trade or business has been adjudicated in many cases. A few of the leading cases are ; ; ; ; ; ; ; *991 ; ; ; ; . In all the cited cases, with the possible exception of some obiter dictum in , one of the material tests to be applied is whether one intends to make a profit. "Unless you can find that element it is not within the statute * * *." A person's transactions will not be excluded from the classification of business merely because they result in loss instead of profit if the honest intention to make a profit is present. Deering v. Blair; Commissioner v. Widener; Commissioner v. Field; Whitney v. Commissioner; all supra. The rule was stated in , as follows:
The proper test is not the reasonableness of the taxpayer's belief that a profit will be realized, but whether it is entered into and carried on in good faith and for the purpose of making*992 a profit, or in the belief that a profit can be realized thereon, and that it is not conducted merely for pleasure, exhibition, or social diversion.
The stipulation, and that is all the evidence that we have, is silent as to any intention on petitioner's part to make a profit out of the exhibition. In Exhibit C, which is attached to the stipulation and is a printed description, together with a few pictures of the Biltmore House and Gardens and Biltmore Estate, it is stated that "An admission *914 charge is made, estimated as sufficient to defray the expenses of opening the house and grounds to the public." From this statement it would seem that all petitioner intended to do was to try to break even. It does not show an intention to operate for a livelihood or profit.
A considerable portion of the stipulation and of the respondent's brief was devoted to the question of whether petitioner had abandoned the estate as a residence. We do not think this is of prime importance. Even if petitioner had continued to reside on the estate, she could still have operated a part of it as a business, and did unquestionably do so as to the Biltmore Dairy Farms.
On the primary question*993 our holding must be that in opening this imposing estate and grounds to the public as a museum and park at a nominal admission fee, estimated as sufficient only to defray the expenses, there was no unqualified intention on petitioner's part to operate for profit. We therefore find that the Biltmore Estate, aside from the Biltmore Dairy Farms, was not a trade or business as that term is used in section 23(a) of the Revenue Act of 1928. It follows that petitioner is not entitled to deduct the additional deduction claimed in her amendment to the petition.
Reviewed by the Board.
Decision will be entered for the respondent.
ARUNDELL, SMITH, and VAN FOSSAN dissent.